Understanding a Factoring Term Sheet

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If you are fed up with banks, you may want to consider getting additional financing through factoring. This is a method that enables you to get anywhere from 70% to 90% of the value of your invoices immediately, instead of having to wait for as long as 90 days to get paid by your customers. You negotiate with the factor, and after the negotiations you get a factoring term sheet that spells out in plain language what you can expect from the contract.

This is pretty much a straightforward document. It explains the factoring agreement, and it includes details such as:

  • The types of invoices they are willing to factor. Some medical factors, for example, won’t handle Medicare or Medicaid payments. It may also specify if you can choose the accounts you can factor, and whether each invoice is handled independently. Minimum amounts may also be specified. For example, the factor may not want to handle any invoice that’s worth less than $1,000.
  • The amount of the advance. This says whether you get 60%, 70%, 80% or 90% of the value of the invoice. Sometimes conditions will be spelled out as to which accounts can receive higher advances than others. For example, accounts with the most credit worthy customers (famous or long-standing businesses) may get bigger advances.
  • The discount rate. This is the fee which is a percentage of the value of the invoice. This may be a fixed rate, or a variable rate depending on the prime rate. Some conditions may also be specified which may affect the rates for certain invoices.
  • Additional fees. Different factoring companies charge different fees. Some, for example, may require an audit of your accounts receivable practices to see if you are doing it correctly. Such an audit may come with a fee. Other fees may include a charge for each invoice, or a termination fee when you want to end the agreement.
  • Disbursement of reserve amounts. The reserve is the rest of the payment, less the fess demanded by the factor. A day may be set aside for disbursement. Payment methods may also be specified (the funds may be deposited directly into your bank account.
  • The length of the commitment. Some contracts require a long term commitment for two years or more. You may have to pay a hefty termination fee if you end the relationship prematurely. Others have no minimum time frames at all. The contract may be month to month, and you may end the factoring agreement after the month.
  • The collection of the payments may also be detailed. Most factors insist on doing the collection themselves, although sometimes the collection may be done by your company of you want to ensure that the payment is done professionally and courteously. However, a factor almost always insists that the payments must be sent directly to them.

Before you sign any contract, you need to make sure that when you get a factoring term sheet that’s clear and accurate. You may want to hire a lawyer to explain the term sheet to you and determine whether the terms are beneficial to you or not.

Would you like a Factoring Term Sheet? Click Here or Call 1-888-382-3766